A Look at Force Majeure, Frustration of Purpose, and Impracticability

As businesses manage their response to the COVID-19 crisis, they may find it impractical or impossible to meet contractual obligations. Some breaches, however, may be legally defensible depending on the parties’ contract and what role the pandemic had on their inability to perform the contract.

Force majeure, frustration of purpose, and impracticability are all legal concepts that may allow parties to defer or cancel contract obligations. However, they are very rarely used. The COVID-19 crisis will make their use more prevalent as businesses seek to renegotiate or cancel contracts altogether. This article explains how businesses should think about these concepts and prepare to use or defend against them.

Force Majeure

Force Majeure, or “superior force,” is an express, boilerplate contract provision meant to protect against unforeseeable disasters. Such provisions generally apply to “acts of God,” such as extreme weather, war, changes in law, and, yes, pandemics. Courts “narrowly construe” force majeure clauses, meaning they are unwilling to excuse parties from contracts unless they can show the event caused the party to breach.

Whether COVID-19 is a force majeure event depends on the contract’s language. First, businesses should review whether their most important contracts have force majeure clauses (they typically do). If they do not contain a force majeure clause, contracting parties must resort to frustration of purpose or impracticability discussed below. Second, companies should determine how broadly the force majeure clause is drafted. For instance, if a clause specifically names “disease” or “pandemic,” COVID-19 will likely qualify. If, however, the provision only applies to “acts of God,” its application will be more limited. Third, the pandemic must generally prevent a party’s performance. For example, if a retailer cannot pay a supplier because of a government-imposed shutdown, the retailer could argue COVID-19 prevented its ability to pay. However, if COVID-19 causes only slowdown for a company that has cash on hand, the company likely cannot use it as a reason to breach. Overall, whether a business can use force majeure depends on the clause’s language and how COVID-19 specifically affected the breaching party.

Frustration of Purpose

“Frustration of purpose” is a defense to contract performance, and it occurs when an unforeseen event negates the purpose of the contract. Critically, the event must affect the contract’s “principal purpose.” This means the unforeseen event strikes at the very reason the parties contracted in the first place. The most famous example involves a business that leased seats for a king’s coronation event. When the king did not show, the court found the king’s nonappearance frustrated the contract’s “principal purpose.” There was no point in providing seats to an event that did not happen. Importantly, however, just because an event makes a contract less profitable or difficult to perform, it does not mean it “frustrates” the contract’s purpose.

Whether COVID-19 qualifies as “frustration of purpose” depends on the “purpose” of the contract. For instance, if a business contracts with vendors to put on an event, but the event venue closes because a government ordered social distancing, the business has a strong argument that the purpose of the vendor contracts is “frustrated.”

Impracticability

Wisconsin’s Commercial Code protects sellers of goods against certain unexpected events where it becomes unreasonably difficult to perform. The Code states that when an unforeseen and uncontrollable event makes manufacturing or delivering goods “impractical,” sellers can defer or cancel their obligations to buyers. This includes events like war, embargo, and unforeseen shutdowns of supply sources. It does not, however, include market fluctuations, for which all businesses must plan.

Like with force majeure and frustration of purpose, whether impracticability applies in this pandemic depends on how it affects a seller’s ability to perform contractual obligations. If a manufacturer relies on raw materials from a foreign supplier and that supplier cannot deliver goods due to an import ban, it may be impractical for the manufacturer to source the materials elsewhere for a commercially reasonable price. As a result, the manufacturer may seek to adjust its production and defer deliveries. Whether it is “impractical” to manufacture goods is highly circumstantial and each case must be analyzed in context to determine whether the defense applies.

Conclusion

Ultimately, the goal for all business during the COVID-19 pandemic is to maintain their business relationships. In times like these, if a party is unwilling to negotiate, however, force majeure, frustration of purpose, and impracticability can be valuable tools in dealing with problematic contracts.

The Best Litigation Team

Q:  Mary, what is your ideal litigation team?

A:  My ideal litigation team includes one other attorney who becomes immersed in the case along with me, understanding the legal theories and the facts that support them.  That’s important for a couple of reasons.  First, two heads are better than one when it comes to litigation strategy.   Second, my co-counsel and I are able to divide and conquer when it comes to depositions and other discovery tasks.

Q:  If the case goes to trial do you change the team?

A:   Typically not.  Two attorneys can be a very effective trial team.  Trial lawyers need to establish a rapport with a jury, and that can be difficult if tasks are divided among too many people.   For consistency, only one of us handles both opening and closing statements but we divide up the witnesses and each of us conducts direct and cross-examinations.

Q:  Any other “must-haves” for your litigation team?

A:   An easy-to-understand story that explains why you win.  Even the most complex cases can be discussed in terms of everyday life experiences to which juries can relate.